31 T.C. 11">*11 The Commissioner determined deficiencies in income tax and additions under section 294 (d) as follows:

The only issue for decision is whether the profit from the sale of lots is taxable at capital gain rates or as ordinary income. The additions to the tax are not contested except as they would be reduced by a reduction of the deficiencies.

FINDINGS OF FACT.

The petitioners filed joint income tax returns for the taxable years in the eighth district of Illinois. They live in Alton, Illinois.

George was engaged since 1936 in the business of contracting for grading, using heavy equipment. The work included grading on roads and other types of grading, clearing areas, ditch work, sewer work, and putting in water lines. He operated that business as a sole proprietor until about 1948 after which he operated through a corporation which he controlled and dominated. The heavy equipment which he was using in 1943 and 1958 U.S. Tax Ct. LEXIS 70">*72 thereafter during World War II consisted of 3 tractors and scrapers and 2 old cranes.

George purchased a tract of rough, unimproved land in Madison County, Illinois, for $ 7,750 in May 1943. It had an area of a little more than 21 acres and was located about a mile and a quarter east of Alton. It was in a residential, not a commercial, zone. A hogback 31 T.C. 11">*12 30 to 40 feet high ran through the property. Subdivisions containing many residences adjoined this tract on three sides and from such subdivisions three streets came to dead ends on the east side of this property, a street abutted it on the north, and a narrow street ran along the north side of the property. There were no improvements on the property in 1943.

George made no use of the property until 1951, but in 1947 he decided to sell it and he erected a sign on the property stating "This Property For Sale, Owner George W. Longfellow." He rejected an offer in 1948 of $ 35,000 for the entire tract upon condition that he would grade it. George, at his expense, had the municipality bring water lines to the tract in the fall of 1950. He had another "very nice offer" in 1950 from a school board for about 7 acres on the east1958 U.S. Tax Ct. LEXIS 70">*73 side of the property, but he rejected that. The sign was knocked down at some time and not replaced.

Maurice Wickenhauser, hereafter called Maurice, was a real estate agent with whom George had been acquainted for many years and with whom he had previously done business. Maurice advised George in May or June 1951 that three builders would be interested in building houses on George's tract of land if George would grade the property, subdivide it, and put in all improvements. Maurice said that he would assist in platting the subdivision and would endeavor to sell all of the lots for a commission. One builder indicated that he would build at least 10 houses if George would improve the property as above described.

George started to grade the property in the latter part of 1951. Maurice, representing George, had an engineer, who had previously done work for George, survey the property and consulted with him as to the number and size of the lots and the location of the streets. A plat of 56 lots was adopted and registered with the proper authorities. That plat did not include the eastern portion of the tract and in 1954 the remainder of the tract was incorporated in a new plat of1958 U.S. Tax Ct. LEXIS 70">*74 lots numbered 57 through 87. One additional unnumbered lot was involved, making 88 lots in all into which the tract was eventually subdivided. The property, as finally platted, was bisected by four 50-foot streets, three running north and south and one running at an angle to those streets. Another street was laid out on the north edge of the property by using a part of George's property to widen the existing street at that point to 50 feet.

George graded the entire tract and put in the streets, as shown in the plats. The name "Turner Acres" was given to the subdivision in the late summer of 1951 when Maurice, acting for George, began to advertise the subdivision. The parties have stipulated that the cost incurred by George in improving the tract was as follows: 31 T.C. 11">*13

1958 U.S. Tax Ct. LEXIS 70">*75 Cost per lot -- 88 lots/$ 56,786.84 = $ 645.30

George agreed to pay Maurice a commission of $ 100 for each lot sold through his efforts and no other real estate agent sold any of the lots. George fixed the sales price of each lot sold and in that connection gave consideration to the cost or probable cost to him of the grading, the streets, the water, the platting, bringing the abstract down to date, and various other costs. The price was originally $ 1,350 for inside lots and more for corner lots. The sales prices were paid in cash. Five contractors bought lots, built houses on them and then sold the individual properties. They installed curbing and gutters in front of those houses and George then put in curbing and gutters in front of adjoining lots to prevent the streets from washing and to help in the sale of those adjoining lots. He added the cost of the curbing and the gutters to the prices of the lots.

George retained the right to approve or disapprove the type and size of houses to be built and the plans had to be inspected and approved either by him, his wife, or Maurice before a house was started. He made that requirement in order to protect the remaining lots.

Maurice1958 U.S. Tax Ct. LEXIS 70">*76 had had experience in developing and selling subdivisions. He put signs on the Turner Acres property showing his name and address and acted as real estate agent in selling most of the lots. The words "Another Maurice J. Wickenhauser Development" appeared on a sign. Maurice paid none of the costs incident to the improvement of the land, he did not help any purchaser with his financing, and the record does not show what expenses, if any, he paid in connection with the sale of the lots here involved. He received his commission when the purchase price was paid in full.

At least 27 houses were built on the subdivision during the 3 taxable years, most of them by the builders whom Maurice had mentioned to George before the grading was started.

31 T.C. 11">*14 Four lots were sold in 1951, 16 in 1952, 16 in 1953, 18 in 1954, and 11 in 1955. The record does not show the sales made from the tract after 1955.

The parties have stipulated that George's expenses during the taxable years on the lots in the Turner Acres subdivision were as follows:

1958 U.S. Tax Ct. LEXIS 70">*77 One-half of the long-term capital gains shown as follows on the returns were reported as taxable income:

1958 U.S. Tax Ct. LEXIS 70">*78 The Commissioner, in determining the deficiency for 1951, eliminated from the net income as disclosed by the return $ 1,466.99 of capital gain and added $ 2,782.83 as "Ordinary income from sale of lots." He explained the adjustment as follows:

(a) It is held that the lots sold by you in 1951 were lots held by you primarily for sale to customers in the ordinary course of your business, within the meaning of Section 117 (a) of the Internal Revenue Code of 1939, and the gain realized is includible in full in your gross income.

Pierce, J., dissenting: I, who was the trial Judge in this case and am the only member of the Court who has seen and heard the witnesses, respectfully dissent from the foregoing report. I would have decided the issue in favor of the petitioners. I entirely disagree with1958 U.S. Tax Ct. LEXIS 70">*87 the summary conclusions set forth in the final paragraph of said report, which read:

No decided case duplicates the facts of this one. No advantage would be gained by comparing the facts in this with those in other decided cases, regardless of the results reached in those cases. * * *

I think the present case is not unique, either as to its facts or as to the issue presented; and I believe that such disregard of the numerous 31 T.C. 11">*19 decided cases which have dealt with the same general problem, is unjustified.

1. In the first place, I think that the issue should have been more clearly and specifically defined. Basically, it is this:

Where the petitioner, for the purpose of liquidating a single 21-acre tract of unimproved realty which he had held for more than 8 years as a "capital asset," caused the property to be subdivided and sold as residential lots by an independent realtor, and where in connection therewith he assumed and paid such costs for grading, interior streets, and water supply as were necessary to make the lots accessible and marketable, did such action put the petitioner into the ordinary course of a real estate business within the meaning of section 117 (a)1958 U.S. Tax Ct. LEXIS 70">*88 (1) (A) of the 1939 Code, and thereby deprive him of the benefit of capital gains treatment on the gains derived from the sale of the lots?

Similar issues have arisen frequently, where due to the growth and expansion of cities or villages, the highest and best use for outlying properties, which theretofore may have been used for agricultural purposes, or which because of their rocky, hilly, or swampy character may have been allowed to remain idle, has been changed to potential residence sites; and owners of such properties, either because they had no further use for the properties or because they desired to realize on the resulting appreciation in value, have subdivided and sold their holdings as residence lots, rather than as undivided acreage.

Such problem, which requires an interpretation of the provisions of said section 117 (a) (1) (A) relating to the carrying-on of the ordinary course of a real estate business, has been considered and dealt with in numerous decided cases, many hereinafter cited, by several of the Courts of Appeals, the Court of Claims, and various District Courts. Some of these cases are very recent; and some constitute reversals of decisions of this Court.

1958 U.S. Tax Ct. LEXIS 70">*89 2. Many of the findings and conclusions of fact contained in the above report do not, in my opinion, reflect the true situation presented by the evidence. This is particularly true of various conclusions of fact set forth in the opinion portion of said report, pertaining to the circumstances and the motives of the petitioner, which prompted him to subdivide the property; which pertain to the nature of the relationship that existed between petitioner and the independent realtor who handled the subdividing and sales; and which pertain to the extent of the petitioner's personal services in connection with the matter.

Based on my personal observation of the witnesses, I regard all of the testimony to be credible.

I would have found the material facts to be as follows:

The petitioner, George W. Longfellow, who resides in Alton, Illinois, has at all times since 1936 been engaged in the business of grading, 31 T.C. 11">*20 earth moving, and similar heavy construction work. Since 1948 he has operated through a corporation bearing his name, which at the time of the trial was handling a heavy construction contract for the United States Government. He has never been licensed to act as a real estate1958 U.S. Tax Ct. LEXIS 70">*90 dealer, or had a real estate office, or advertised or otherwise held himself out as being in the real estate business. Except in connection with the particular tract involved, he has never had any part in any real estate subdivision. And miscellaneous realty sold by him in the taxable years involved, including a farm and three lots, was treated by the respondent as not having been held for sale in the real estate business.

In the latter part of 1942 or the spring of 1943, a local realtor came to see petitioner and requested him to make an offer for the tract here involved, called Turner Acres, which the then owners were under pressure to liquidate. This tract, which contained about 21 acres, was located in the country about 1 1/4 miles outside the city limits of Alton. Except for about 7 acres in the northwest corner, which were relatively level and adjacent to the principal access road to the north, the tract was of exceedingly rough terrain; was traversed by steep-sided ravines and a hogback that ran diagonally through it and had a height up to 30 or 40 feet; and was covered by trees, many having a large diameter. None of the tract was improved or income-producing; and, in 1958 U.S. Tax Ct. LEXIS 70">*91 its then existing condition, it was not suitable for either farming or subdivision.

Petitioner, after some hesitancy, made an offer of $ 7,000 for the entire tract, which was accepted; and on May 3, 1943, he and his wife took title in joint tenancy, at a total cost of $ 7,750. Their intention, at the time, was to use the level portion at the northwest corner as a site for erecting a new residence for themselves and also for erecting machinery sheds to replace those near petitioner's residence in Alton, which he was then using. Such improvements were at first deferred because of existing restrictions on building materials, and later because of increased building costs; and thereafter, the plan to make such improvements was abandoned. The tract thus remained in the hands of petitioner and his wife, totally unused and non-income-producing.

In about 1947, petitioner concluded that he had no use for the tract, and decided to get rid of it; and he placed a large "For Sale" sign upon it. This produced no offers. Subsequently in about 1948, a company offered to buy the entire tract for $ 35,000, but only on condition that petitioner would grade it at his own expense. Petitioner estimated1958 U.S. Tax Ct. LEXIS 70">*92 that such grading would cost approximately $ 24,000, and he rejected the offer. Also, in 1950, the county school district offered to buy the level 7-acre portion at the northwest corner, for $ 17,000; but the sale of this portion would have cut off the remaining 14 acres from the principal access road and from the city water which had been extended 31 T.C. 11">*21 to the property line at said point; and would have left such portion unusable. Thus, this offer also was rejected; and the entire tract continued to remain, as before, unused and non-income-producing.

During the war and by 1951, the so-called Milton area near Alton, in which Turner Acres was located, enjoyed increasing use for residential sites. Subdivisions had been developed by other parties, on three sides of the tract; a considerable number of houses had been built; and there was need for additional schools and building sites.

In the spring of 1951, a professional subdivider named Wickenhauser came to petitioner's home, and said that he could dispose of the tract for petitioner, by subdividing and selling it for building sites to professional house builders with whom he had contact, if petitioner would first grade the property1958 U.S. Tax Ct. LEXIS 70">*93 at his own expense and assume such miscellaneous costs as those for surveying and bringing in the city water. Petitioner replied that he would be willing to do this only if it would result in his liquidation of the entire tract. Wickenhauser thereupon assured petitioner that this could be done; brought to petitioner's home one of the builders, named Ladd, who agreed to buy at least 10 building sites; and told petitioner that he knew a number of other builders who likewise would be willing to buy sites. Petitioner then decided to proceed with the suggested plan.

Petitioner completed the grading of the entire tract in a period of about 3 or 4 months in the fall of 1951, using for such purpose the services of his construction corporation, for which he personally made payment. Thereafter, Wickenhauser, operating through his own company known as the Maurice J. Wickenhauser Agency, laid out the subdivision; had the plat approved by the public authorities; staked out the lots; placed "For Sale" signs on the properties, which carried the name of his agency and made no mention of petitioner; solicited and showed the lots to builders and other potential purchasers, and passed on their financial1958 U.S. Tax Ct. LEXIS 70">*94 ratings; and otherwise handled the sales. Wickenhauser caused about two-thirds of the 21 acres to be platted in the year 1951, and the balance in 1954 which was subsequent to the years here involved. He received a commission of $ 100 on each lot sold.

The expenses of the subdividing, except for the grading which cost $ 24,950, were relatively low. These expenses, which have been stipulated, included nothing for paving, sidewalks, sewers, landscaping, or utilities other than water. A few curbs were installed where it was necessary to control drainage. Petitioner did not build any houses. Aside from arranging for the grading and paying the miscellaneous expenses, he did practically nothing other than to execute contracts or deeds which Wickenhauser and his salesmen submitted.

The sales prices of the lots ranged from $ 1,350 to about $ 1,500; and petitioner's net gain per lot, as determined by the respondent with 31 T.C. 11">*22 respect to the 1943 cost of the tract plus improvements and selling expenses, averaged about $ 670.

Most of the lots sold were purchased by professional house builders with whom Wickenhauser had contact. Four lots were sold in the year 1951 -- all to one purchaser1958 U.S. Tax Ct. LEXIS 70">*95 who was the builder, Ladd, who had agreed prior to the beginning of the subdivision work to purchase at least 10 sites. In each of the years 1952 and 1953, which are the other 2 years here involved, 16 lots were sold. But out of the total of 36 lots sold in all 3 taxable years, 29 were sold to Ladd and four other professional builders. In the following years not here involved, other lots were sold as the builders continued their construction activities; and some lots were still being sold at the time of the trial. However, the taxation of any gains realized in such later years is controlled by the new provisions of section 1237 of the 1954 Code, and is not before us.

3. The holding of the majority report is, in my opinion, out of line with the weight of judicial authority, and also out of line with the recent trend of decided cases which have dealt with the general problem involved.

One of the most recent of these cases is that of the Court of Appeals for the Sixth Circuit, Yunker v. Commissioner, 256 F.2d 130 (1958), reversing the decision of this Court at 26 T.C. 161. The Court of Appeals' opinion contains an extensive1958 U.S. Tax Ct. LEXIS 70">*96 review of many authorities in the area, and states in part:

With respect to the interpretation of the statute, the words and phrases "trade or business," "ordinary" and "customers" are to be construed in their ordinary and not in an artificially created meaning. Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212. To be engaged in the real estate business means to be engaged in that business "in the sense that term usually implies." Dillon v. Commissioner, 213 Fed. (2d) 218, 220 (C. A. 8). * * *

Where a taxpayer liquidates his real estate holdings in an orderly and businesslike manner, [by a series of sales, in smaller parcels] he is not by that circumstance held to have entered into the conduct of a business. * * *

* * * *

If petitioner had sold the entire tract at a profit, in one transaction, it is unquestioned that she would be entitled to capital gains treatment. It was impossible for her to sell the entire tract at one time at a profit. To hold that she would not be entitled to capital gains treatment, when she would otherwise be entitled to it, merely because she selected the only possible method of selling her1958 U.S. Tax Ct. LEXIS 70">*97 property at a profit, by installing improvements and selling in smaller parcels, would seem to be an injustice resulting from a forced and artificial construction of the statute, which, in our view, could not have been intended by Congress.

The Court of Appeals for the Seventh Circuit, which is the court that presumably would have jurisdiction of any appeal from the decision in the instant case, has given effect to similar principles, in two cases: Chandler v. United States, 226 F.2d 403 (1955); and Three States Lumber Co. v. Commissioner, 158 F.2d 61 (1946), reversing a Memorandum Opinion of this Court. In each of these cases, the 31 T.C. 11">*23 Court of Appeals appears to have recognized the principle that, even though in the circumstances a large number of parcels may be sold and the expenses incurred may be substantial, these factors are not sufficient to put the taxpayer-seller into the ordinary course of a real estate business within the meaning of the controlling statute, if they are incidental and appropriate to his primary purpose of liquidating the capital asset involved. In the Chandler case, the court1958 U.S. Tax Ct. LEXIS 70">*98 said in part:

Of course, it is abundantly clear that this taxpayer started with a capital asset. Resort to dictionary definitions of such words as "ordinary," "trade" and "business," as expected, are little aid here. Nor can any workable formula be developed which will show what quantum of commercial activity equals "business." Moreover, "liquidation" is, also, devoid of any magical meaning. Here the taxpayer desired to replace acreage with cash. The lands were not purchased in one market for the purpose of selling holdings in another. * * *

Defendant would insist that Capitol [the taxpayer] sit idle, wishing for a buyer or buyers, under the threat that any selling effort would result in deprivation of capital asset treatment. Despite the blurring, in relevant precedent, between capital gain and ordinary income we think the specific facts established in this case warrant capital gain treatment for taxpayer's transactions. * * *

The Fifth Circuit likewise has allowed capital gains treatment in several cases dealing with the problem: Smith v. Dunn, 224 F.2d 353 (1955); Fahs v. Crawford, 161 F.2d 315 (1947);1958 U.S. Tax Ct. LEXIS 70">*99 Consolidated Naval Stores Co. v. Fahs, 227 F.2d 923 (1955); and Ross v. Commissioner, 227 F.2d 265 (1955), reversing a Memorandum Opinion of this Court. In the Smith case, the court said in part:

The court below seems to have had the idea that any taxpayer who seeks to make a better sale of a capital asset consisting of land forfeits the right to claim profits as capital gain by the mere fact of subdividing and seeking out purchasers, even though he does this by a regular real estate broker acting in the capacity we have described. We rejected that concept in Fahs v. Crawford, supra, [161 F.2d 315] * * *

Also in said Crawford case, the Fifth Circuit said in part:

In effect, what the taxpayer was doing [by installing water, lights, and paving] was to render more attractive a capital asset already owned, in order to sell it, in much the same way as an owner would paint and redecorate an old house, and landscape the grounds, in order that his broker could more readily dispose of it for him. These activities were but preliminaries. * * *

The Court of Appeals for the Second1958 U.S. Tax Ct. LEXIS 70">*100 Circuit dealt with the problem in Phipps v. Commissioner, 54 F.2d 469, modifying 12 B. T. A. 1293. There, in an opinion written by Judge Augustus N. Hand, the court allowed capital gains treatment to the taxpayers, notwithstanding that property was subdivided into about 70 lots and substantial improvements were installed; pointed out that after the property had been so improved, nothing remained to be done by the taxpayers except to receive offers submitted by their brokers; and held that the taxpayers' 31 T.C. 11">*24 "supervision of their own investments" could not be said to be a "trade" or "business."

The Court of Claims, in the recent case of Gordon v. United States, 159 F. Supp. 360">159 F. Supp. 360 (1958), allowed capital gains treatment to gains derived from sales of subdivision lots, and placed emphasis on the fact that:

in conducting the liquidation program, [the taxpayers] entrusted the disposition of the property to an independent real estate broker and did not themselves take an active part in the sales campaign, * * *

Recent District Court cases to the same general effect, include: Mackall v. United States, 162 F. Supp. 522">162 F. Supp. 5221958 U.S. Tax Ct. LEXIS 70">*101 (E. D. Va., 1957); Berberovich v. Menninger, 147 F. Supp. 890">147 F. Supp. 890 (E. D. Mich., 1957); Schumacher v. United States,    F. Supp.    (S. D. Texas, Mar. 18, 1958). See also Powers v. United States,    F. Supp.    (S. D. Ill., June 11, 1958).

Applying the principles thus enunciated in the foregoing cases to the evidence in the instant case, I would have held: That the 21-acre tract here involved started out as a capital asset; that subdivision of said tract was incidental, necessary, and appropriate to petitioner's liquidation of the same; that the cost of the preliminary grading and the other miscellaneous expenses were no more than was necessary and appropriate to bring the extremely rough tract into line with adjacent properties, and to make it accessible and marketable for sale, either by subdivision or otherwise; that practically all subdivision and sales work was performed by the independent realtor; and that none of the foregoing was sufficient to put petitioner, who had never engaged in the real estate business, into the ordinary course of such a business within the meaning of section 117 (a) (1) (A) of the 1939 Code.